Monetary Policy Implementation with an Ample Supply of Reserves

65 Pages Posted: 24 Jan 2020 Last revised: 14 Jul 2023

See all articles by Gara Afonso

Gara Afonso

Federal Reserve Bank of New York

Kyungmin Kim

Board of Governors of the Federal Reserve System

Antoine Martin

Federal Reserve Bank of New York - Research and Statistics

Ed Nosal

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Simon Potter

Peterson Institute for International Economics

Sam Schulhofer-Wohl

Federal Reserve Banks - Federal Reserve Bank of Dallas; Federal Reserve Bank of Chicago

Multiple version iconThere are 5 versions of this paper

Date Written: January 1, 2020

Abstract

We offer a parsimonious model of reserve demand to study the trade-offs associated with various monetary policy implementation frameworks. Prior to the 2007-09 financial crisis, many central banks supplied scarce reserves to execute their interest rate policies. In response to the crisis, central banks undertook quantitative easing policies that greatly expanded their balance sheets and, by extension, the amount of reserves they supplied. When the crisis and its aftereffects passed, central banks were in a position to choose a framework that has reserves that are: (1) abundant—by keeping their balance sheets and reserves at the expanded level; (2) scarce—by vastly decreasing their balance sheets and reserves; or (3) somewhere in between abundant and scarce—by moderately decreasing their balance sheets and reserves. We find that the best policy implementation outcomes are realized when reserves are somewhere in between scarce and abundant. This outcome is consistent with the Federal Open Market Committee's 2019 announcement to implement monetary policy in a regime with an ample supply of reserves.

Keywords: federal funds market, monetary policy implementation, ample reserves

JEL Classification: E42, E58

Suggested Citation

Afonso, Gara and Kim, Kyungmin and Martin, Antoine and Nosal, Ed and Potter, Simon and Schulhofer-Wohl, Sam, Monetary Policy Implementation with an Ample Supply of Reserves (January 1, 2020). FRB of New York Staff Report No. 910. Rev. July 2023, Available at SSRN: https://ssrn.com/abstract=3524621 or http://dx.doi.org/10.2139/ssrn.3524621

Gara Afonso

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

HOME PAGE: http://nyfedeconomists.org/afonso

Kyungmin Kim

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Antoine Martin (Contact Author)

Federal Reserve Bank of New York - Research and Statistics ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-6943 (Phone)

Ed Nosal

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Simon Potter

Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

Sam Schulhofer-Wohl

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

HOME PAGE: http://sschulh1.wordpress.com

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